Investors seeking to remove fossil fuel producers from their portfolios have a small but growing number of North American-listed exchange-traded funds to choose from.
These investors are in good company, according to gofossilfree.org, a non-profit that tracks the fossil fuel divestment movement. It notes more than 1,300 pension, endowment and other institutional investment funds have divested nearly US$15-trillion in investments in fossil fuel companies over the last decade.
Here is a sampling of ETFs offering exposure to broad major indices largely without oil, gas and coal producers.
iShares ESG Advanced MSCI Canada Index ETF (XCSR-T)
Management fee: 0.15 per cent
Assets under management (AUM): $31-million
Return since launch in April 2020: 41 per cent (AUM and returns as of March 11)
Only a handful of ETFs listed on the Toronto Stock Exchange offer some spin on fossil fuel divestment and most do not explicitly say it in the name, says Patti Dolan, a portfolio manager at Mission Wealth Advisors of Raymond James in Calgary.
An example is XCSR, which offers a passive indexing strategy for Canadian equities. Tracking the MSCI Canada IMI Choice ESG Screened 10 per cent Issuer Capped Index, XCSR doesn’t hold Canadian oil and gas producers but includes utilities involved in clean energy production such as Innergex Renewable Energy Inc. and Northland Power Inc., she says.
Some of XCSR’s top holdings include Shopify Inc. and Canadian National Railway Co. Ms. Dolan notes the ETF is also heavily weighted in financials with more than 40 per cent of assets allocated to the banking sector.
Desjardins RI Canada Low CO2 ETF (DRMC-T)
Management expense ratio (MER): 0.29 per cent
One-year return: 40 per cent
DRMC is another Canadian-focused ETF aiming to replicate the diversified Canadian equity market, minus oil, gas and coal producers. Launched in 2018, DRMC tracks the Scientific Beta Desjardins Canada RI Low Carbon Index with top holdings that include Shopify, Magna International Inc. and even pipeline company Enbridge Inc. Ms. Dolan notes Enbridge company “is actually the second-largest producer of renewable energy in Canada.”
She points out DRMC is heavily weighted with financials, which account for almost half the portfolio.
DRMC is part of a suite of nine low-carbon ETFs from Quebec-based Desjardins Global Asset Management, including the RI Canada Multifactor – Low CO2 ETF (DRFC-T) and DesjardinsRI Global Multifactor – Fossil Fuel Reserves Free ETF (DRFG-T). The additional screens come with higher MERs of 0.58 per cent for DRFC and 0.68 for DRFG.
Ms. Dolan cautions the Desjardins ETFs have a relatively short track record and small AUM, a common problem among many ETFs excluding fossil fuel companies. “Small AUM can make it costly for a company to operate so the ETF could … be terminated if it does not attract more assets,” she says.
Wealthsimple North America Socially Responsible Index ETF (WSRI-T)
Management fee: 0.20 per cent
Return since inception in June 2020: 17 per cent
The ETF from robo-adviser Wealthsimple is another option for investors seeking exposure to Canadian equities. It’s a North American-focused ETF with about 18-per-cent exposure to the Canadian market, Ms. Dolan says.
WSRI has no energy sector assets and tracks the Solactive Wealthsimple North America Socially Responsible Factor Index, which includes a negative screen for companies involved in fossil fuel production.
Some of WSRI’s top holdings include Hydro One Ltd., gold producer Agnico Eagle Mines Ltd., and Vulcan Materials Corp., a manufacturer for the construction industry. Its sector exposure is also more diversified than the Canadian-listed options here, with only about 13 per cent of assets allocated to financials.
SPDR S&P 500 Fossil Fuel Reserve Free ETF (SPYX-A)
Expense ratio: 0.20 per cent
One-year return: 45 per cent
The U.S. market offers more choice than Canada for fossil-fuel-free ETFs, but options are still few and far between, says Mike Atkins, founding partner of the Denver-based research firm ETF Action.
SPYX is the top choice for many environmentally conscious investors. A broad-based, passive index tracker, it mirrors the S&P 500, much like the SPDR S&P 500 ETF Trust (SPY-A), the world’s largest ETF by AUM with about US$335-billion in assets. However, unlike SPY, SPYX doesn’t include companies with oil and gas and coal reserves. “Basically, you’re getting the same portfolio,” but without companies like Marathon Oil Corp., Cabot Oil & Gas Corp. or Exxon Mobil Corp., Mr. Atkins says.
SPYX and SPY share 96 per cent of the same holdings, including Apple Inc., Microsoft Corp. and Johnson & Johnson among their top 10. The result is a similar return over the past year of about 45 per cent and 5 per cent so far in 2021, which Mr. Atkins says, for SPY, is driven in part by the recent rebound in oil prices.
ProShares S&P 500 Ex-Energy ETF (SPXE-A)
Expense ratio: 0.27 per cent
One-year return: 45 per cent
This ETF “does not hold itself out to be fossil-fuel free but it is by definition,” says Ben Johnson, director of Global ETF research at Morningstar in Chicago. SPXE excludes the energy sector on the S&P 500 while tracking otherwise the performance of the S&P 500. “It came to the market at a time when energy was really down,” he says about the fund, launched in the fall of 2015 when oil prices were slumping.
With no allocation to the energy sector, its most sizable exposure is to technology, accounting for about 25 per cent of the portfolio. This has led to the ETF outperforming the broad index since 2015, Mr. Johnson says. Since its launch, the ProShares fund is up more than 130 per cent versus about 102 per cent for the S&P 500.
SPDR MSCI EAFE Fossil Fuel Free ETF (EFAX-A)
Expense ratio: 0.20 per cent
One-year return: 38 per cent
If you’re looking for a broad-based ETF excluding fossil fuel companies on a global basis – but without exposure to Canada, the U.S. and emerging markets – EFAX is worth considering, says Mr. Johnson.
EFAX’s performance, however, is similar to iShares MSCI EAFE ETF (EFA-A), a broad-based fund that holds energy companies and also returned about 39 per cent over the past year. Mr. Johnson says the similarity is in part because energy already makes up a small share of EFA’s assets at about 3 per cent.
“If you look at EFAX, its allocation to the energy sector was at 0.32 per cent.” Those energy holdings involve companies working in renewable energy like Finland-based Neste Oyj, a former oil company, or firms supplying the energy industry, like steel pipe manufacturer Tenaris S.A.
“We’re not talking about a meaningfully different complexion when looking at these two side-by-side,” he says. “As a result, the two have moved largely in lockstep.”